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Graham defensive investor

✕ Avoid

Value investing — S&P 500 members, SEC financial statements

Benjamin Graham's seven tests for the defensive investor from The Intelligent Investor: large, financially strong, consistently profitable, long dividend record, growing earnings — and only at a moderate price.

Tested offline on SEC EDGAR financial statements (manage.py rolling_backtest) — no in-app backtest.

How it works

An illustration of the rules on made-up prices, not real data.

Long-run result — 2012–2026, point-in-time S&P 500 + SEC financials

Annual return

2.6%

SPY 15.1%

Worst drawdown

-4.9%

SPY -33.7%

Almost never finds a stock: 0–1 S&P 500 companies passed all seven tests in any year 2012–2026, so it sat in T-bills.

Rules

  1. Revenue ≥ $2B (adequate size)
  2. Current ratio ≥ 2, and long-term debt ≤ net current assets
  3. Positive earnings every year on record (5–10 years, SEC data from 2009)
  4. Dividends paid every year for the last 20 years
  5. Earnings per share up ≥ 33% over the record
  6. P/E ≤ 15 on 3-year average earnings, and P/E × P/B ≤ 22.5
  7. Hold up to 30 passing stocks equally (≥ 10 slots, rest in T-bills); review each April

Assessment

  • + Margin of safety built in — pays a low price for proven, solid businesses
  • + Historically held up far better than the market in 2007–09
  • + One review a year — fits a long horizon and keeps taxes low
  • − Very few large US companies pass today (current ratio ≥ 2 rules out most)
  • − Value investing lagged growth for much of 2007–2020
  • − SEC data only from 2009, so the 10-year earnings test is shortened before ~2019